SVB Financial Group (SIVB) 2015 Q3 法說會逐字稿

Hello, and welcome to the SVB Financial Group Q3 2015 earnings call. My name is Meisha, I will be your operator for today's call.

(Operator Instructions)

Please note this conference is being recorded.

I will now turn the call over to Meghan O'Leary, Director of Investor Relations. Meghan O'Leary, you may begin.

Thank you, Meisha, and thanks everyone for joining us today. Our President and CEO, Greg Becker, and our CFO, Mike Descheneaux, are here to talk about our third-quarter 2015 financial results. As usual, we'll be joined by other members of management for the Q&A. Our current earnings release is available on the Investor Relations section of our website at svb.com.

We'll be making forward-looking statements during this call and actual results may differ materially. We encourage you to review the disclaimer in our earnings release dealing with forward-looking information, which applies equally to statements made in this call. In addition, some of our discussion may include references to non-GAAP financial measures. Information about those measures, including reconciliation to GAAP measures, may be found in our SEC filings and in our earnings release.

We'll limit the call including Q&A to an hour and with that, I will turn it over to Greg Becker.

Thank you, Meghan, and thanks, everyone for joining us today. We had a solid third quarter, delivering earnings per share of $1.57 and net income of $81.7 million. Our core earnings engine remains strong and we are seeing healthy activity across all client groups. Highlights of the third quarter included, healthy average loan growth of $596 million, or 4.2%, strong average client funds growth of $6.5 billion, or 9%, solid core fee income growth of 3.5% and stable credit quality overall. And although the exit markets were tempered, especially IPOs, we had very healthy net gains of $23.4 million on warrants and investment securities, net of controlling interests.

Our results reflect continued positive conditions for our innovation clients despite certain broader market issues that have emerged in the last few months. Market volatility has increased. There is concern about China's growth rate and the Feds direction on interest rates is uncertain. In spite of these issues, our clients are doing well and we see plenty of opportunity for growth and expansion ahead. Given that we are approaching the end of the year, I'm going to focus primarily on 2016, our priorities, a preview of financial expectations and our view on the implications of some of the market dynamics we are seeing.

We have three key priorities for 2016. Each of which continues or accelerates an initiative we currently have in place designed to maintain our leadership in the innovation space. First, continuing to enhance our strong brand and reputation. This means ongoing improvement of our client experience through investment in our digital platform. We need to operate the way our clients do and continue to make it easy to work with us. It also means differentiating ourselves even more through our products and services, but mainly through the value add of knowledge and networks that SVB can uniquely provide.

Second, continuing to invest in our business for the long-term growth. This means developing our existing team and hiring expertise when we need it so we can have the right team in place to focus on delivering better than peer growth. It also means ensuring we have the systems, solutions and infrastructure to support that growth in a scalable way.

Third, maintaining our strong risk management. This means ensuring credit remains stable and healthy overall, even if we do experience a slowdown. It also means continuing to enhance and invest in risk management and compliance to meet increasing regulatory requirements, especially as we approach $50 billion of assets. We are confident in our ability to deliver on these priorities in 2016, in part, because we have been focusing on investing in them for some time and are making good progress.

Now, let's look at our preliminary outlook for 2016 and please keep this in mind, in a departure from our usual practice, we are not basing this outlook on the latest forward curve. Given the unusual level of uncertainty over whether the rate increases will actually materialize in 2016, we believe that it's prudent at this time to assume no market interest rate increases between now and the end of 2016. Despite this assumption on our part, we expect solid performance.

First, average loan growth in the low double digits. That would put us in the $1.5 billion to $2 billion growth range that we talked about as reasonable from an annual pace perspective, given our emphasis on smart growth in a competitive low-rate environment. Second, average deposit growth in the low double digits. This assumes continued robust new client acquisition and reasonably healthy funding trends for our clients with continued success in our off-balance-sheet initiatives.

Third, net interest income growth in the low double digits. If rates did rise consistent with the forward curve, it would increase our net interest income outlook significantly to the low 20% range. Fourth, stable credit quality overall. Specifically, we expect full-year net charge-offs between 30 and 50 basis points of average total gross loans, consistent with our expectations for 2015.

Our fifth metric is core fee income, which we expect to grow in the mid-teens. This would largely be driven by foreign exchange, credit cards and payments. And if rates did rise consistent with the forward curve, that would increase our core fee income growth outlook to the low 20% range due to higher income from our client investment funds. And finally, non-interest expense growth, net of NCI, in the high single digits. And this includes the impact of the investments I mentioned in our priorities. Clearly we are expecting good things in 2016, even without help from interest rates and assuming no significant deterioration of the US or global economies in our markets.

Now, let's talk about the backdrop. Although we are positive about 2016, there are few areas we are watching closely. These include valuations, VC investment levels and exits. Our view has been consistent. There is frothiness in the markets, to be sure, but we do not believe we are in a bubble. So what do we think is happening?

First, the best companies are getting more attention. They are raising larger rounds of equity and staying private longer. This, more than anything, is what's behind these higher valuations and one of the reasons VC investment is at such high levels. Because they been able to access healthy equity funding, these highly valued companies generally have low leverage. In addition, many of them have significant customer and revenue traction and many are disrupting industries and creating significant new market opportunities. Of course, some companies will prove to be over valued and some will fail. Others will grow into their valuations over time, even if they are somewhat ahead of themselves at the moment, and some will become breakout companies.

Second, despite solid overall new company formation, backed by a growing group of resources for startup capital, there are signs that fewer venture capital rounds are being raised. Although we haven't seen a trend yet, at some point companies with more challenging business models, less differentiation or poor traction will have more difficulty raising funds. This is more likely given some of the market pullback we've seen, but let's be clear, this is the venture capital innovation model. Truly innovative companies and early movers will succeed while others will fail.

Third, we are watching exits. IPOs slowed significantly in the third quarter. It's too early to say whether this is the beginning of a longer IPO pullback, but volatility in the markets may be a reason for companies to stay private longer. So, we are paying attention to these potential issues, and we do not see them having a material impact at this point. And on that note, we clearly get a lot of questions about the health of the venture industry and what impact we might see, and I want to underscore might, if there are meaningful disruption in VC activity. If a meaningful disruption were to occur, it could result in deleveraging by our clients, lower VC investment and warrant gains and possibly unrealized losses. And higher loan losses in our early-stage loan portfolio, although it's very important to note that early-stage loans constitute a relatively small part of our loan portfolio at less than 10% of total loans. Our experience suggests these negative impacts will be short-lived, if they occurred, as the innovation economy has repeatedly proven to be more resilient and has shown higher growth over time than the broader economy.

In closing, we are pleased with our third-quarter results and the momentum going into the fourth quarter. Moreover, we expect a solid performance in 2016, even without rate increases. While we are keeping our eye on the markets and paying close attention as always to credit, we feel we have good insight into the health of our industries and the advantage of working with the best companies and investors in them. The innovation space has grown and changed significantly in the last three decades, but its resilience and dynamic nature has persisted through all markets. We continue to view the global innovation space as the best possible place to be for the long term. Thank you, and now I'll turn the call over to our CFO, Mike Descheneaux.

Thank you, Greg, and good afternoon, everyone. We had a solid quarter marked by healthy balance sheet growth, strong core fee income and stable credit quality overall. I would like to highlight a few items in my comments today, which I will cover in more detail shortly.

First, healthy loan growth. Second, substantial growth in total client funds. Third, higher net interest income, despite a lower interest margin. Fourth, credit quality, which was inline with our expectations. Fifth, higher core fee income with continued momentum in foreign exchange and credit cards and payments. And finally, lower expenses due primarily to lower incentive compensation.

Let's start with loans. Average loans grew by $596 million, or 4.2%, to $14.9 billion. This growth was driven primarily by private equity capital call lines, although we saw growth across most client segments. Period-end loans grew by $1.1 billion to $15.3 billion, primarily due to growth in private equity capital call lines. Although we continue to see ample opportunity to lend, we remain focused on high-quality, smart loan growth with appropriate pricing, size and structure relative to our risk and cost of capital. In this low rate and competitive environment, they have all been pressured. Due to a moderately better than expected pace of loan growth year-to-date, we are raising our full-year 2015 outlook from the mid-20s to the high 20s, although we expect to be near the low end of that range.

Now let's move to total client funds. That is, combined on balance sheet deposits and off-balance-sheet client investment funds. Average total client funds grew by $6.5 billion, or 9%, to $79.4 billion and period-end total client funds grew by $4.9 billion, or 6.5%, to just above $80 billion for the first time in our history. This growth was due to continued funding for our venture-backed clients, healthy inflows from our private equity and venture capital clients and continued new client acquisition.

Average off-balance-sheet client investment fund balances grew by $4.1 billion, or 11%, to $42 billion and accounted for 63% of total average client funds growth in the quarter. Period-end client investment funds grew by $3.5 billion, or 8.7%, to $43.4 billion and accounted for 71% of period-end total client funds growth. Average on-balance sheet deposits grew by $2.4 billion, or 7%, to $37.4 billion, while period-end deposits grew by $1.4 billion, or 4%, to $37 billion. We are maintaining our full year 2015 deposit outlook of growth in the high 20s and expect to finish the year near the low end of that range.

Turning to net interest income and the net interest margin. Net interest income increased by $10.8 million, or 4.4%, to $255 million in the third quarter. This increase was due primarily to higher loan and investment securities balances. Higher average loan balances, plus one additional day during the quarter, contributed $7.7 million in interest income, although loan yields decreased by 3 basis points due to loan mix and lower prepayment fees.

Average fixed income securities balances increased by $1.5 billion, or 7%, to $23 billion due to strong deposit growth, although yields on the portfolio decreased by 6 basis points to 1.54%. Yields were affected by a $1.8 million increase in premium amortization expense related to increased prepayments on mortgage-backed securities due to lower market rates. New purchases of $2.2 billion during the quarter consisted of US Treasury and Ginnie Mae securities with an average blended yield of 1.5%. Portfolio duration remains stable at 2.7 years, compared to 2.8 years in the second quarter. Our net interest margin decreased by 8 basis points to 2.5%, primarily due to strong deposit growth, as well as lower loan and investment yields.

For the full year 2015, we expect our net interest income to be at the low end of our outlook of the high teens and net interest margin to be at the high end of our range of 2.4% to 2.6%. Looking forward, if our investment balances continue to be bolstered by strong deposit flows and rates remain low, all things being equal, we would expect continued pressure on our net interest margin. If rates rise, that will certainly help our net interest margin and net interest income.

Now, let us move to credit quality. Our credit quality remained stable overall and generally within our expectations. Here are the highlights. Net charge-offs of $28.5 million, primarily due to one loan for which we had previously recorded significant reserves, an increase in non-performing loans, due primarily to two newly impaired loans, although non-performing loans are still low at $115.5 million, or 75 basis points of total gross loans, and a higher provision due to period-end loan growth and specific reserves related to the additions to non-performing loans.

Now, the details. Our provision for loan losses was $33.4 million compared to $26.5 million in the second quarter. This figure reflects $10.4 million related to loan growth, $20.1 million in specific reserves for newly impaired loans and $4.6 million related to charge-offs not previously reserved for. Net charge-offs were $28.5 million, reflecting gross charge-offs of $29.1 million, primarily related to one loan of $21.7 million partially impaired in the fourth quarter of 2014 for which we had prior reserves of $17.9 million. To keep things in perspective, year-to-date, net charge-offs were 31 basis points compared to 39 basis points for the same period in 2014. Non-performing loans increased by $14.7 million to $115.5 million, primarily due to the addition of two sponsored buy-out loans totaling $41.3 million. This edition was partially offset by the $21.7 million charge-off previously mentioned.

Overall, our loan portfolio is performing within what we consider normal ranges. We saw no material change in criticized balances during the quarter and, to date, we are not seeing a discernible impact from recent market volatility. Non-performing loans also remain well within normal ranges. As we indicated last quarter, we expect non-performing loans to remain at their current levels for several quarters given the nature of sponsored buyout lending. We expect net charge-offs as a percentage of total gross loans to be at the low-end of our full year 2015 outlook range of 30 to 50 basis points, and we are reaffirming our full-year outlook for all other credit metrics.

Now, let us move to non-interest income. I will refer to several non-GAAP measures in my discussion and we encourage you to refer to the non-GAAP reconciliations in our press release for further details. GAAP non-interest income was $108.5 million in the third quarter compared to $126.3 million in the second quarter. Non-GAAP, non-interest income net of non-controlling interest was $102.1 million compared to $117.7 million in the second quarter. The primary differences between third quarter and second quarter non-GAAP, non-interest income were lower gains on warrants and lower, though still healthy, PE and VC-related investment securities gains. Offset somewhat by higher core fee income.

We had warrant gains of $10.7 million compared to $23.6 million in the second quarter, driven primarily by valuation updates and to a lesser extent, by M&A activity. It is important to point out that warrant gains in the second quarter were elevated due to the $13.9 million gain from the Fitbit IPO. Further contributing to the decline is that there were very few IPOs in the this quarter and, as a result, no notable gains on exercises. We have private equity and venture capital related investment gains, net of non-controlling interest, of $12.7 million compared to $15.9 million in the second quarter. This included $7.2 million of realized gains from distributions in our strategic and other investments portfolio and $6 million of gains from our managed funds of funds.

Turning to core fee income, core fee income increased by 3.5%, or $2.3 million, to $68.4 million in the third quarter, primarily due to continued strength in foreign exchange and credit card fees. This represents a 28% increase in core fee income over the same period last year. As a reminder, core fee income includes foreign exchange, credit cards, letter of credits, deposit service charges, lending related fees and client investment fees. As a result of continued strength in our core fee lines, we are increasing our full year 2015 outlook for growth in the low 20s to the mid-20s and expect to end the year in the middle of that range.

Moving onto expenses. Non-interest expense decreased by $9.4 million, or 4.8%, to $184.8 million. This decrease was driven primarily by lower incentive compensation expense primarily related to a slight change in our full-year earnings outlook, coupled with elevated levels of incentive compensation in the second quarter. Specifically, the decline was related to our incentive program based on our relative ROE performance against peer performance. We are reaffirming our 2015 full-year outlook for expense growth in the low double digits.

The key variables that could drive expenses higher than our expenses are loan growth, which affects our loan loss provision and, ultimately, incentive compensation expense and warrant investment securities gains, which also affect incentive compensation. If we outperform on any of these categories, it could lead to higher than expected expense growth for the quarter and the year overall.

In closing, we delivered a solid performance in the third quarter and are on track to meet our 2015 outlook. As we expected, loan growth during the quarter returned to more typical levels and credit quality remained stable overall, despite the modest increase in non-performing loans. Although we are paying close attention to our loan pipeline and portfolio in light of recent volatility in the stock market, as well as concerns over momentum in the global markets, we see solid momentum in loans and fee income and are not seeing anything significant that would change our outlook on credit quality at this point.

Competition and the availability of low-cost capital in the markets remain challenges to growth and yield and requires us to be discerning about the opportunities we pursue. That said, there are plenty of opportunities as our preliminary outlook for 2016 suggests. We remain focused on delivering high-quality growth today that will continue to position us well for the long-term.

Thank you, and now I would like to ask the operator to open the line for Q&A.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question is from Joe Morford with RBC Capital Markets.

Thank you, good afternoon, everyone.

Craig, you touched on this a little bit, but obviously with the chatter about the lack of new tech IPOs and the poor performance of those that have made it out, how important is that for your average client and at this point does really matter if these unicorns with billion dollar valuations can't go public today at these levels. Have a raise enough money in the private market to support their businesses for quite a while?

Joe, it's Greg. When I think about the impact of these more substantial companies, there is a couple things. One is if companies can't go out and go public, and this is broadly speaking, if there is no IPOs that could impact our securities gains, warrant gains, in some way as I alluded to. When you think about the rest of the business, if these companies stay private longer, it's not necessarily a bad thing. They have a lot of liquidity, whether they are public or private, they have a lot of liquidity and so quite honestly very few of them borrow money. So there just isn't that big of an impact.

As I said in my comments, again, very few of them have, these larger companies, have a lot of debt. So from a risk perspective they also don't present many challenges to us. So the short story is, them directly, I would say no. The question is what happens to the rest of the industry, right? If there is more challenges of some of these larger companies and that could have a ripple effect. I think it is manageable and the question would be if that were to happen how severe could it be? I think right now we feel it would definitely be manageable.

Okay. The other question is, obviously the charge-offs this quarter were over and beyond the 2015 and preliminary 2016 full-year guidance, so in terms of the percentage rate. What gives you the comfort that we're still dealing with more one-off or company-specific issues as opposed to something more systemic?

Joe, I'll start and Marc can certainly chime in here. Maybe just to step back a little bit, because when we talk about the net charge-offs, net charge-offs year to date are around 31 basis points and so it's still within our guidance of the 30 to 50 basis points for the full year. As we said in our comments, our prepared remarks, we still expect it to come in between that 30 and 50. I wouldn't say it was any change in our expectations with respect to net charge-offs.

Okay, thanks so much.

Thank you. Our next question is Jared Shaw with Wells Fargo.

Good evening, how are you?

Hi, Jared.

Just sticking with the theme on the early stage financings and timing of the VC-PE utilization, some of the data we have been seeing, it seems like the pace of private capital deployment in the industry certainly seemed like it peaked in third quarter and is falling so far in fourth quarter. Are you seeing that -- sort of the trend as we are entering the fourth quarter now, or do you expect to see the VC-PE capital call lines stay at similar levels into the fourth quarter?

So there's a couple questions there, one is just the overall funding and then it relates to outstandings on PE and VC. So I will start, this is Greg and then Marc might want to add the utilization levels and PE-VC capital call facilities.

We did see a drop in the number of financings in the third quarter although the dollars were still exceptionally strong and it goes back to what I said in my comments. Money is really being more highly allocated towards the higher profile companies, which makes sense. Again, few of them are going public. They are growing revenue and they are able to raise capital. They are just staying private longer.

One of the things we're looking at is the number of companies that are being invested in and that is a slowdown. We are not seeing that impact our portfolio yet, either from a credit perspective or, clearly as you saw in the third quarter, from a total clients' funds perspective, which was incredibly strong. We are just not seeing it yet. And, again as I mentioned in my comments, we can see a slowdown clearly, but we don't expect anything, what I will call dramatic. I'm going to turn it to Mark to talk about utilization and the capital call lines of credit for VC and PE.

Picking up there, it's Marc, utilization of his credit facilities was up in the third quarter and it remains to be seen whether that will continue into the fourth quarter, though as we have seen in prior years, there can be some seasonality to the third quarter as well as the fourth quarter. Said another way, oftentimes there is a little bit of a slowdown in the third quarter and a pickup in the fourth quarter. Will we see that this year is unclear, but that is the point I would add.

We would expect to see some of that at the end of the year. The question is the magnitude. As you know, last year we had a significant run-up at the end of the year. We are not predicting that to happen to that level but we expect to see some of it.

As you sort of gauge the temperature in Silicon Valley there, if IPOs did slow down and companies stayed private longer and held onto their VC funding longer, do you see that as primarily driving slower levels of future VC funding or that it would attract more money to the VC market and you could see actually that market expand for the private fundings?

Predicting the venture capital market is a difficult task. If somebody would've said this year we would end up at the levels we are, I would have been wrong in my prediction. When I look at 2016, for me, I'd say more of a stable number is probably what I would look at. I'm hard-pressed to see it grow from where it is right now, even though you're going to see more companies stay private longer.

Other things that come into play though, you were talking about the IPO market, just to clarify, the M&A market was still robust and, quite honestly, we expect that to continue. You've heard some of these big announcements of mergers together. While I don't think that will create a trend, I do think it helps and I think more companies may look at these companies to say we need to acquire them, we need to merge with them, to create more critical mass. So I expect that market to maintain or continue to be robust into FY16.

Okay, thanks. On then on the incentive comp, it seems like a little bit of the disconnect with what we've seen in terms of loan growth and what the accrual was last quarter, that we've seen in third quarter. So most of that is due to the -- can you just go through again what the change in incentive comp was given the strong growth we saw running this quarter?

This is Mike. It is somewhat a twofold explanation. One, incentive compensation increased significantly in Q2 as you probably saw. Now in Q3, the mechanism we were referring to in the prepared remarks, it relates to our incentive program related to ROE performance, our ROE performance, compared to our peers and it's based on a ranking mechanism.

It doesn't take a lot of movement in the ranking to move it up or down and, in fact what happened this quarter with this slight change in our view with the full-year ROE, our ranking amongst our peers slipped just ever so slightly and what happens is you have this catch-up factor from Q1 and Q2, which also makes for some larger swings and some incentive compensation, but it does get back to the pay-for-performance model and shows that ROE is very important for us.

Thank you, very much.

Our next question is Ken Zerbe with Morgan Stanley.

Thank you, very much. Good evening, guys. A question for Mike actually. You guys have talked about the loan growth guidance, call it roughly $1.5 to $2 billion going forward from here annually. A lot of that seems to be based on the ROE model about putting a business that actually meets your ROE hurdles. Can you help us understand, you've been talking about it for couple quarters but at the same time fed funds futures over the last several quarters has really come down a lot.

How much is your ROE estimates based on interest rates and does the forward curve actually change or could it lead to changes in your loan growth guidance? Thanks.

This is Greg, I'm going to start with it and then Mike can add. When we think about, we call it smart growth, our way of looking at it from a ROE perspective, we're looking at the return we are going to get, quite honestly, without a lot of impact for interest rates. So when you look out -- again a lot of these credit facilities, as you know, are shorter-term in nature. So it would be a little bit different maybe if you were looking at the long end of the curve, but obviously we're looking at what prime is going to be doing, fed funds rates, LIBOR, etc.

So that hasn't changed a lot. So the fact that each short term, medium term has come down, quite honestly, it really doesn't have a lot of impact on the number that we gave. Again, one of the things that could change, right, and we talk about upside, we could see in FY16 some upside from private equity, our private bank as Mike articulated and that is one area, but we're still comfortable even with the change in rate outlook with the $1.5 to $2 billion.

I would just add that when we came out and talked about the $1.5 billion to $2 billion in Q1, that was contemplated given the backdrop of the low-rate environment and the competitive rate environment. So, hence, that was one of the reasons why we came down and bookend those ranges there.

And it's Marc, I'll add one more thing, lest we focus entirely on the ROE and the economics of it, smart growth is also about credit structure and deal size. In the increasingly competitive environment we've been in, that is another thing that we think about every day now that we are looking at opportunities as to whether it's price, size and structure are within our parameters.

Understood. I generally get the concept of why that could actually be higher if competition eases. But given how competitive the market is today, do you view the $1.5 billion to $2 billion really as a floor or is there anything that is possible that could drive that growth even slower than that?

This is Greg. Yes, there's a million things that can happen. You could have a market downturn the way described it and we don't expect that to happen. But if you did see a dramatic change in the economy, if you did see a dramatic change in venture capital activities and companies couldn't get funded, you could see a slowdown, as I said, de-leveraging is one of those things that could happen. Again, because technology companies tend to have more liquidity. That could happen, but as we are, given perspective on our views for 2016, we don't expect that to happen. We are comfortable with that $1.5 to $2 billion level.

Thank you, very much.

Our next question is from Julianna Balicka from KBW.

Good afternoon. I have a couple of questions. One, in terms of your outlook for next year, you are reducing your core fee income growth to the mid-teens from your current run rate, which you just increased to the mid-20s. And given the fact that you have been taking market share gains and expanding these businesses, why are you reducing your year-over-year growth expectations this much?

Julianna, this is Greg, I will start. When you look at the numbers, the key growth is coming from, again, FX, we believe, and credit cards are the two drivers and we have seen substantial growth in those areas and the teams have done an excellent job.

That being said, you do have a little bit of a law of large numbers coming into play and I would argue when you look at kind of a mid-teens level, that is still extremely strong growth when you look at the base that we actually have right now. So, could there be upside, yes. But I would say right now our perspective as we look out into FY16 is we are comfortable in that mid-teens range.

Got it, okay. When I look at your average deposit growth in the low double digits, I'm trying to do some basic arithmetic. Your deposit growth for the year already into the high 20s implies some $44 billion of average deposits next quarter to just make the math work for that. Then to make the math work for 2016 for your average deposits to grow in the low double digits, are we looking at declining deposits? It doesn't tie up arithmetically.

Yes, this is Mike. I'm not quite sure what the math is, perhaps we can take that off-line and I can walk you through. Certainly, as Greg said in his remarks and my remarks and we are seeing continued growth of funds, we don't necessarily see it as a contraction. Obviously, it could happen, but, again, given the nature over the last several quarters and years, you tend not to see that, but perhaps I can help you off-line.

I would just add to it. When you think about the growth we've had this year and the level of venture capital activity being as high as it has been, my comments for venture capital activity would be kind of a stable to maybe even a slight decline from where we are right now given how strong it has been and a little bit of the turmoil in the market or uncertainty. If that were to happen clearly you could end up seeing the growth rate of deposits slow down.

Remember though, we are still driving towards more than half of the deposit balances or total client funds moving off-balance sheet and we would expect that to continue. Still expect it to grow and feel good about the outlook, but it will be tempered compared to where it was in 2015.

Okay, thank you.

Our next question is from Steven Alexopoulos with JPMorgan.

I wanted to start on credit. Is this now three sponsor-led buyout loans that have been impaired over the past two quarters?

It's Marc, and yes, that is the statistic. Having said that, I think it's important to step back and just to give that three in two quarters some context. We have been in the buyout lending business for nine years now. The current portfolio is 130 loans of which three, to your point, are now in our non-performing. Hopefully that helps.

Let me just add on to it. So when you look at that, it is three out of 130. As we've said when we've been on road shows with you and other people and talked on the call, clearly there is going to be a period of time when you have these companies that have issues and challenges and, again, our goal is that we are working with the right sponsors to help turn these companies around, which we certainly believe they will and will occur.

I would say focus on the outlook that we have given for 2016 as kind of a point of view for our expectations on what may happen. Bottom line is we don't expect it to happen, we clearly looked at the portfolio. Doesn't mean it can't or won't, but we are comfortable with where we are right now and, again in context, it is three out of 130.

Greg, maybe to follow-up on that though, are these three related? It just seems unusual to go nine years and have none of these become impaired and then have three in two quarters.

Sure. I would first say there is a portfolio seasoning aspect to this that as we've made more loans and they've been on the books for a longer period of time, inevitably you're going to have a couple that turn out this way. Having said that, there really is little that these companies have in common. The two from the current quarter are from our life science segment. They both sell to hospitals, but that's really where the similarities end. I would liken these to sort of individual circumstances, company-specific issues with all three of them, which by extension is not indicative of any systemic issue or emerging trend that we can see at this time in the portfolio segment.

That's helpful. Maybe to shift gears for minute. Greg, to follow-up on your comments that you're seeing maybe less potential VC funding, are you guys already seeing startups adjust cash burn and what is your expected impact on deposits from that, if it is happening?

Steve, it's Greg. It's being talked about. Have we really seen it a whole lot? The answer is no. I just say we haven't seen it yet. Do I expect it to occur? Yes. I do expect that companies are going to be more disciplined as they go into 2016 and, we've seen this before, where there becomes noise in the market about different people talking about high burn rates and giving advice to their portfolio of companies to be disciplined and it takes a quarter or two or three quarters for them to realize that and start incorporating it in their plan. So do I think it's going to happen in 2016? Yes, I think that will happen, but as of yet we haven't seen it.

Okay. And then you mentioned you were seeing reductions in valuations, right, rounds? I'm just curious, how widespread is that? Is that really contained to the larger, more public ones that we read about? You guys arguably have one of the best [light to shine] on what is going on there. Is it just widespread?

Yes, just to be clear. The amount of venture capital was very strong this quarter. When you look at the number of rounds being raised, that was lower and it was especially true at the seed and early-stage. A lot of the money as I mentioned were to companies that have been around a little bit and are getting traction and more people are putting bigger chunks of money behind them.

So when I think about the level at the Series A or seed round, again it's slowed. Do I expect that to continue? My point of view, my crystal ball, would say it's going to probably stay at about this level and we'll probably see, again, slower than what we saw for a good part of FY15, but I think the level of rounds, the number of rounds for seed in early third quarter is probably going to be more consistent with what we're going to see fourth quarter into first quarter into 2016.

Okay, thanks for all the color.

Our next question is from John Pancari with Evercore ISI.

Good afternoon.

Hi, John.

A question on the credit again, related to Steve's line of questioning. If these credits are unrelated and non-systemic as well, why should non-performers remain high? Is it just because the cure rate is lower on these types of credits or can you give us a little color there?

I think it is maybe best, it is Marc again, best to start with the historical perspective on SVB where, generally speaking, our non-performing loans have by and large been early-stage loans that tend to resolve themselves more quickly. With these larger loans, and by extension larger companies, they take longer to turn around. And it is that several quarters or sometimes a year or more to make that turnaround happen and give us the confidence that it is being sustained that results in these being stuck in that category for longer periods of time.

Okay. Also related to that, if this is a seasoning aspect as you indicated, is it fair to assume then that there is more on the way as the portfolio continues to season? You grew that book at a pretty rapid clip over the past couple of years.

While we did have rapid growth that really has slowed over the last seven quarters and I think that is a function of the discipline that we have maintained in terms of loan structure, leverage levels, et cetera. And that is the first point. I think the portfolio we have today is positioned pretty well.

The second point I would make is, I think as Greg already mentioned, we took another hard look at the portfolio, looking for exactly the kind of issues and trends you might expect we would have looked for. At present don't see any indication that we're going to see more, at least in the immediate future.

Just add on to it, eventually we are going to have more of them, but, obviously, our plan and expectation is that some of the ones that are on non-performing right now will roll off. Others may be added, but we still expect to be in a comfortable range of NPLs and as you know our guidance is that kind of 50 to 100 basis points. And we're still comfortable with that and we expect to be comfortable with that through cycles. Now, again, maybe at some point it may inch up above that. We don't expect to see that right now. That's our crystal ball based on, again, Marc's review and our team's review of the portfolio, but that's just the structure of these type of loans.

If I could just ask one more on credit, a quick one. You indicated that the criticized loan levels remained relatively stable, what is the level? What is that percentage?

5.6% of gross loans.

Okay, do you have with that was a year ago?

A year ago, I don't. Last quarter it was 6.1%, so it came down quarter over quarter.

Okay, thank you.

The next question is Jennifer Demba with SunTrust.

Thank you, good afternoon. Could you talk about your expectations for growth in the international markets in FY16 and what you are seeing out there in terms of demand?

Jennifer, this is Greg, I will start. When we look at -- I bucket it our global stuff into three categories. One is what we're doing in the UK and Europe, and I would include Israel in that set as well, and then I would also look at it and look at Asia in two ways. One is what is happening in our joint venture and the second one, what is happening in Asia for SVB.

What we look at is in the UK and Europe, we've seen very good growth. We expect to continue to see very good growth in that category, in the 30% plus range, and that is just because there is still a big market opportunity and we still have low market share and we feel good about the outlook there. When you look at the other part, right? It is more deposits, less loans. We have some capital call lending to private equity firms in Asia, which is a few hundred million dollars and that will grow, but it is still going to be small.

And then you look at the next category, which is the joint venture, in the joint venture, again, we treat it as an equity method as opposed to a consolidation in our balance sheet, so we don't expect to see really much change in that number on an equity basis during the course of FY16. We are in the middle, as we talked about, we have got out R&B license, we're building that out, and we feel good about that. But as we've said, and we will continue to say for while, that is a long-term growth proposition and won't contribute truly for a number of years, although we do benefit from that from cross-border activity that comes from those introductions and from those relationships that are being built in the joint venture.

Great, thank you, very much.

Our next question is from Brett Rabatin with Piper Jaffray.

Hi, good afternoon. I wanted to just ask, I know I've asked this a year or two ago, just thinking about the profitability you guys have currently and maybe if growth is slower, you have almost 40% of your earning assets and pretty low yielding securities and cash. Would at least some modest level of a barbell strategy eventually become appropriate with the outlook for interest rates continuing to push out further, lower for longer so to speak?

I wish we knew exactly what was going to happen so you could make definitive judgments on where to invest. Having said, that we all know that's not going to happen. One of the things we are always very conscientious of is the size of our investment securities portfolio.

So when you have a size of the portfolio as we do, approximately say 55% to 60%, plus or minus in that range, you have really got to be very focused on liquidity and shorter-term duration. That is what our philosophy has been for the last several years and it's served us very well and we will likely continue to maintain and keep that shorter duration security in managing that duration extension risk until we get more clarity on where rates are going to go.

I guess a follow-up question on that, is when rates do rise, what are you assuming happens to the on balance sheet deposits and what actions might you take with off-balance-sheet to mitigate that?

That's a very difficult question to answer. It's very difficult to understand how our clients will be thinking about what will happen when rates do go up because nobody's been around these last few years to even understand what an interest rate is, so the behavior is a little bit uncertain. Again having said that, you have to be prepared for that if there is pressure or migration to go off, that you have to maintain a very liquid securities portfolio, which we are doing.

We are well-prepared for several billion dollars if it does need to move off. Again, if we don't want it to move off, we can certainly afford to pay up to keep it on if necessary because in that sense if deposits are being pressured to go off that means you are probably in a higher interest rate environment, which you're making more money on net interest income that you can afford to pay off. It's a bit of a complicated question, but the short answer is we are prepared for if there is pressure to be able to handle that if necessary.

Great, thanks for the color, Mike.

Our next question is Tyler Stafford with Stephens.

Good afternoon, guys. Just a follow-up on Jenny's question earlier, do you have the global loan and deposit balances as of Q3?

This is Greg. The deposit balances, again, roughly haven't changed a whole lot. They are about $6.5 billion when you look at it and this is mainly deposits. It might be a little bit off balance sheet, but it is almost all deposits.

On the lending side you can look at it and you are roughly around, again, roughly around $1.1 billion. Again, it has grown a little bit, but again, part of the fluctuation up and down ends up being some of the capital call loans to private equity firms and that literally can swing $100 million or $150 million in a month. That is just because the portfolio hasn't built up enough concentration so that the advances and payoffs offset each other enough to create more of a standard growth rate. Again, that's kind of what we are building from, but we feel really good about where we are and the opportunities ahead. As I've said before, we still expect that's going to be at a growth pace much higher than what we see with the rest of the portfolio.

Okay, thanks. And then your bank level leverage ratio is a little over 7% now, just curious to as your current thoughts on capital and then what's the cash at the holding company as of Q3?

Yes, so we continue to watch that Tier 1 leverage ratio very closely at the bank level and the holding company level. And as you pointed out, it is lower this quarter because of deposit growth. It is still within our acceptable ranges. As you heard us say before, we are fine between 7% and 8% and there certainly are certain things we can do to continue to shore that up.

The answer to your question about cash at the holding company level, because you're implying that we could downstream some of that to help the ratio at the bank level, we probably have somewhere around $365 million or so currently at the holding company level. Now naturally you wouldn't downstream all of that to help it out, but certainly you could downstream some of that to help out, if necessary. But again, right now it is still within our ranges.

Okay, thanks. And then one more, if I could sneak it in. Of the off-balance sheet client fund growth this quarter, how much of that came from new client adds versus existing clients moving to the off-balance sheet products, roughly?

I don't have the exact numbers in front of me, but defining what a new client is, a new clients within the quarter or is it a new client within the last six months, it is very difficult to assess that. I would say, generally what we have seen, is somewhere between 15% to 20% per quarter is coming from new clients originating in that quarter. But again, that is a bit difficult to pin down to define what truly is a new client because when the new client comes on board they are not necessarily funded right away and they may be funded a couple months later.

Thanks, guys. I appreciate it.

Our next question is Aaron Deer with Sandler O'Neill & Partners.

I'm good, thanks.

We have no further questions at this time. I would like to hand back over to CEO Greg Becker for closing remarks.

Thank you. Thanks, everyone, for joining us today. As we talked about, we feel really good about the third quarter and, again, the balance of 2015. And as we talked about 2016, although some of the numbers are tempered with deposit growth and a few other areas, the numbers are still strong when you look at it from a guidance on loan growth, outlook in fee income and other areas.

We feel good and the reason we feel good is not just our ability to execute, it is because we are in the right market and have the right team of people and, of course, have the best clients. We feel really good about where we are despite the kind of turmoil we are all dealing with in the market and want to thank all of our clients for trusting us and our employees for supporting our clients. And so with that, have a great day. Thanks.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you all for participating. You may all now disconnect.